Archive - Feb 21, 2014 - Story

Having thrown in his bearish towel in December, the self-proclaimed "last bear standing" has had a tough January. His plan, to "just be long pretty much anything" appears to have back-fired (for now) as Eclectica reports a 3.6% loss in January - the worst month since the Fund's inception. His largest loss was on a long Japan theme (leveraged) and that was somewhat offset by gains in his short emerging markets and short China themes. It appears nothing hs changed from Hendry's December perspective of the inexorable melt-up in developed markets thanks to central bank largesse (247% of NAV exposed to stocks) though he does note "renewed turmoil" which, we suppose, merely supports his thesis longer term.

The "common knowledge" meme among the uber-paid economists and talking-heads os Wall Street remains that if data is bad, it's the weather's fault; but if data is good, that's the recovery. However, as Lance Roberts explains in this brief clip, the deterioration in US fundamental macro data is not a one-month blip and in fact "the trend of economic growth has clearly been on the decline rather than gaining strength as has been hoped by the majority of economists". Furthermore, he notes (and shows in simple chart form) that the trend of consumer weakness, which makes up 70% of economic growth, has declined to levels that are more normally associated with very slow growth economies. Simply put, it's not the weather stupid, it's the economy.

The following exchange between then-Kansas Fed president (and current FDIC director) Thomas Hoenig and the Chairsatan, uttered during the historic Sept 16, 2008 FOMC meeting, is of particular importance for four reasons: 1) it appears to be the first instance in the Fed records, where the phrase "too big to fail" is memorialized; 2) it highlights something that has become all too clear by now: in giving to a culture of moral hazard, the Fed is now being openly "played" by the market (read the big banks); 3) it confirms that the Fed has learned zero lessons from the crisis and 4) the thinking behind the "Bernanke (global) Put" is laid out for all to see.

The entire banking sector is based on two illusions: 1) Thanks to modern portfolio management, bank debt is now riskless; and 2) Technology only enhances banks' tools to skim profits; it does not undermine the fundamental role of banks. The global financial meltdown of 2008-09 definitively proved riskless bank debt is an illusion. It's not just that banks are no longer needed - they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.

"The CNN team was informed that their correspondent credentials were revoked," Venezuela's Information Ministry vice-president Francisco Perez stated. Ironically, for CNN, the decision was announced vis Perez' Twitter account, following Maduro's proclamations last night that "Enough! I won't accept war propaganda against Venezuela." Interestingly, given the opposition's need to raise the awareness among the 'poor' in Venezuela if they are to succeed, local television networks have provided almost no live coverage of the protests against Maduro. While just one "journalist" has his credentials revoked, Maduro has threatened, to expel the whole network from the country if it did not "rectify" the way it has covered deadly political protests.

The short answer: if it did, the Chairman is unaware of it. Or is he? [Laughter]

The following chart showing the use of the words "economy" and "markets" in the Fed's September 16, 2008 meeting transcript is presented without comment.

“We planned to allocate another tranche according to that arrangement. Yet in the current situation we have many questions as to how the money will be used and how it will be paid back," said Russian Finance Minister Anton Siluanov, according to ITAR-TASS this morning.

*RUSSIA URGES RESPECT FOR UKRAINE SOVEREIGNTY, LEGITIMATE GOVT

Siluanov also added "[central bank] interventions can prove a waste of gold and currency reserves that will lead to nothing and will not prevent the hryvnia's devaluation."

The world may have been crashing and burning, and as Bernanke admitted in March 2008, "At some point, of course, either things will stabilize or there will be some kind of massive governmental intervention, but I just don’t have much confidence about the timing of that" (guess which one it was), but at least the Fed ended the catastrophic 2008 yeat on a high note. The chart below shows the number of the time the FOMC committee had an moment of levity as captured by [Laughter] in the FOMC transcripts. Perhaps not surprisingly, the December 2008 meeting, when the market was in free fall, saw the biggest number of laugh lines in the entire year.

While, for now, depositors at Austria's Hypo-Alde-Adria-Bank (nationalized in 2009) have not had assets confiscated, Austrian authorities are shifting in an unusual (scary precedent-setting) direction. Amid the resignation of the bank's CEO, the government is taking aim at 'speculators' who dared to buy the bank's bonds below par - and made money therefore on the back of the taxpayer. "What financial markets expect is not always what you want politically," Austria's finance minister warned, "if someone buys today at a lower price, saying ‘shortly, I’ll get 100 back,’ that’s what’s agitating the people."It seems Europe has a new template.

While it's useful to keep the dream alive (and blame the weather for any weakness that ruins the "sustainable recovery" meme) the data (once again) does not support that "common knowledge" whatsoever...

Existing home sales plunged 5.1% (considerably worse than the 4.1% drop expected) to its lowest level in 18 months. This extends the string of missed expectations to 5 months as even the ever-credible NAR chief economist said it was not the weather but "we can’t ignore the ongoing headwinds of tight credit, limited inventory, higher prices and higher mortgage interest rates." First-time homebuyers plunged to a mere 26% of the total - the lowest share on record as all-cash (and spec) investors rose to a record 53% share of sales.

In a world in which there is no risk, only return (thank you Federal Reserve Risk Management LLC), hedge funds - used to generating Profits just by sitting on legacy positions - see no need to reallocate their portfolios. Nowhere was this more evident than in the position turnover in Q4. As Goldman calculates, total asset turnover in Q4 dropped to 28% - a new all time low. In fact, the only increase in turnover, either buying or selling, was in the tech and infotech spaces. Everything else saw an unprecedented buyers and sellers strike.

The die has been cast, and it appears that the world is finally on the path to the great "carry-trade unwind" endgame. If so, this is what it will look like...

1. Within 48 hours of the signing of this agreement, a special law will be adopted, signed and promulgated, which will restore the Constitution of 2004 including amendments passed until now. Signatories declare their intention to create a coalition and form a national unity government within 10 days thereafter. 

2. Constitutional reform, balancing the powers of the President, the government and parliament, will start immediately and be completed in September 2014.

3. Presidential elections will be held as soon as the new Constitution is adopted  but no later than December 2014. New electoral laws will be passed and a new Central Election Commission will be formed on the basis of proportionality and in accordance with the OSCE & Venice commission rules.

4. Investigation into recent acts of violence will be conducted under joint monitoring from the authorities, the opposition and the Council of Europe.

5. The authorities will not impose a state of emergency. The authorities and the opposition will refrain from the use of violence. The Parliament will adopt the 3rd amnesty, covering the same range of illegal actions as the 17th February 2014 law.