Archive - Feb 27, 2014 - Story

And just like that the Chinese yuan devaluation has shifted away from the merely "orderly." In the past few hours of trading, China, which as we reported two days ago has started intervening aggressively in the Yuan market, has seen its currency crash by nearly 0.9%, which may not seem like much, but is in fact the largest drop since December of 2008, and at last check was trading at around 6.18, even as the PBOC fixed the CNY reference rate 0.02% higher from the last official close to 6.1214, erasing pivot support point at 6.1346 and 6.1408.  Naturally this means that the obverse, the CNYUSD, has crashed to as low as 0.1620. Should this move sustain without reverting, this will be the biggest weekly loss ever! The dramatic move is shown on the chart below.

If the most disturbing, if underreported, news from yesterday, was Obama's "modification" of NSA capabilities, which contrary to his earlier promises, was just granted even greater powers as phone recording will now be stored for even longer than previously, then this latest development from the Supreme Court - one which some could argue just voided the Fourth amendment - is even more shocking. RT reports that the US Supreme Court has ruled that police may search a home without obtaining a warrant despite the objection of one occupant if that occupant has been removed from the premises. With its 6 to 3 decision in Fernandez v. California on Tuesday, the Court sided with law enforcement’s ability to conduct warrantless searches after restricting police powers with its 2006 decision on a similar case.

"In 2013, China embarks on a new road after the conclusion of the Third Plenum of the 18^th National Congress of the Chinese Communist Party. On December 26, China solemnly commemorated the 120th anniversary of the birth of Mao Zedong. On this same day, Japanese Prime Minister Shinzo Abe provoked China by visiting the Yaksukuni Shrine in Tokyo. In response, the Chinese Foreign Ministry spokesman quoted Mao Zedong’s “On Protracted War,” and implied that the final victory will belong to China. The new China is born in blood and fire, and is not only unafraid of war, but also courageous in welcoming reasonable and lawful conflict, because defending the country from aggression serves to further boost the development of the state’s power. The Chinese nation loves peace, but there is little doubt that glory drenched in blood will pave China’s road to revitalization. This is the glory that generations to come will treasure.  Sound the alarms for war preparation, remold our firm convictions, wake up the fearless people, and revive our strategic industries—our country is moving forward and our future is bright!" - President Of China's Marine Institute For Security And Cooperation

Gold declined from $1,900 in September 2011 to $1,188 on December, 19, 2013. Silver declined from $48.50 to $18.50 over approximately the same time frame. Precious metal equities declined by approximately 70% over this period. This move down played out exactly as was scripted. However, let us review the causes of this decline. We start out with the most important words ever written by a regulator: BaFin, the German equivalent of the SEC, said that precious metals prices were manipulated worse than LIBOR. What are we to read into this, particularly the word “worse”? Obviously, worse than LIBOR could not mean that more money was fraudulently earned since the LIBOR markets are many orders of magnitude larger than the precious metals markets. Then it must mean that the egregiousness of the pricing dysfunction was materially larger in precious metals.

According to the stock markets in the US and in Europe, the world’s economy is not just in good shape, but is in the best shape it’s ever been.  The S&P 500 hit an intraday new record high of 1,858.71 on Feb 24, 2014, and is now 18.6% above the peak it hit in 2007, a moment everybody now recognizes was heavily overvalued. An almost 19% gain above the prior all time high is an enormous and unusual event. Surely, you are thinking, there must be an equally compelling story and loads of fundamental data to support such a bull market?

Well, there really isn’t.

It doesn't take any special insight into the situation in Ukraine to conclude that no one narrative illuminates all the dynamics. Various contesting Grand Narratives have emerged in the media--neofascist coup, rampant corruption, east versus west, to name a few--but these only describe a few of the regional fault lines and complexities... I describe the U.S. Deep State as the National Security State which enables a vast Imperial structure that incorporates hard and soft power--military, diplomatic, intelligence, finance, commercial, energy, media, higher education--in a system of global domination and influence.  One key feature of the Deep State everywhere is that it makes decisions behind closed doors and the surface government simply ratifies and implements the decisions. I have covered various aspects of geopolitics and the Deep State for years, for example:

According to the Economic Policy Institute, a Washington think tank supported by organized labor, the answer to generating up to 6 million more jobs is as simple as ending global currency manipulation. But not in the sense of ramping USDJPY or AUDUSD at key market inflection points which mostly benefits such FX-rigging chatrooms as "the Cartel", no: they are thinking more big picture, in the "central bank manipulation sense." The report says that "several foreign countries devalue their currencies to make their products cheaper, making it difficult for U.S. manufacturers to compete, the report said." In essence what the group suggests is that the US currency is overvalued relative to the rest of the world, and that by "realigning exchange rates, U.S. trade deficits would be reduced by up to $500 billion per year by 2015. Such a move would increase U.S. gross domestic product by up to $720 billion per year and create up to 5.8 million jobs, the report said." Said otherwise: stop foreign currency manipulation, but allow and encourage the US to keep pushing its own currency even lower.

That the bulk of Americans (especially those 4+ million whose insurance policies have recently been cancelled as a result of the ACA) have to pay more for healthcare as a result of Obamacare, is now largely accepted and well-known. But did you know that the cost of Obamacare is slowly metastasizing to other places? Such as your restaurant bill.

Presenting Exhibit A.

Just like the rental bubble whose bursting we chronicled here just last week, so the institutional bubble has just popped, which we know courtesy of RealtyTrac data reporting that institutional investors — defined as entities purchasing at least 10 properties in a calendar year — accounted for 5.2 percent of all U.S. residential property sales in January, down from 7.9 percent in December and down from 8.2 percent in January 2013. This was the biggest one month plunge in history. It gets worse: the January share of institutional investor purchases represented the lowest monthly level since March 2012 — a 22-month low.

The lucky number for the S&P500 was four, which after three aborted attempts to take out the January 15 all time high, finally succeeded on the fourth try materializing in a furious buying panic in Spoos in the last minutes of trading. However, in terms of catalyst, there was absolutely nothing to push the market to new highs: durable goods were a disappointment as we explained earlier (and led banks such as Barclays to further lower their GDP forecast for the year), while initial claims rose to the highest of the year. Which leaves only Yellen as the factor, although as can be seen on the chart below, one can just as easily say once US traders walked in today, the channel lift algo was activated, and with Spoos meandering all day in a straight line within the channel, finally burst through to highs with the closing print.

With European peripheral bond yields collapsing every single day to new all time lows (primarily driven by Europe's near-certainty that a US-style QE is imminent as we first showed here in November, despite Mario Draghi's own words from November 2011 that a QE intervention is virtually impossible), increasingly more of Europe is trading just as safe, if not more, as the United States. And in keeping with the analogies, considering a major US metropolitan center, Detroit, recently went bankrupt, it is only fair that Europe should sacrifice one of its own historic cities to the gods of negative cash flows. The city in question, Rome, which as the WSJ reports, is "teetering on the brink of a Detroit-style bankruptcy."

Goodbye SAC Capital. Hello SEC Capital.

Russia may be awaiting a diplomatic resolution of the Ukraine crisis, but we wouldn't hold our breath especially with the deposed president Yanukovich set to conduct a press conference tomorrow from Russia's Rostov-on-Don at 5pm local time, where we hardly anticipate a scaling back of the escalation in what is sure to not be an abdication from power. Instead, Putin continues to prepare for the worst and is openly signalling to the West that if he has to fight to regain influence in the Ukraine, he will, as a top Kremlin politician warned last week. As such it was not surprising to read that two Russian warships, the Minsk and the Kaliningrad which last week were sent out on deployment around Syria, crossed back into the Black Sea, most likely in direction Sevastopol, as the build up of Russian forces in the Crimea continues.

Just like in yesterday's scorching 5 Year auction, demand for today's $29 billion in 7 Year paper was blistering, with a yield of 2.105% stopped through the When Issued 2.108%, and the lowest since November as appetite for the belly of the curve is the highest in months. The Bid to Cover was also very strong at 2.723, the highest since November 2012, and like in other shorter-maturity auctions, has reverse the recent declining trend in BTCs. But the most notable features in the conclude auction, the bulk of which will naturally be quickly flipped back to the Fed, is that while Indirects took down 41.12% or spot on with the 12 Month average, and Dealers were left with 34.28%, below the 40.0% TTM average, it left Directs with 24.6% - this was the highest Direct take down in the history of the bond. The Primary Dealers, who have been openly complaining about Direct Bidder participation in bond auctions in recent weeks, will certainly not be happy about this particular development as increasingly more paper goes straight into the hands of Direct bidders.