Archive - Feb 2014 - Story

For those who have been following the abysmal loan creation in Europe, which recently dropped to an all time low today's inflation, or rather make that deflation, data out of Europe should not come as much of a surprise. Then again, with January inflation posting the biggest drop in history, when it tumbled by a record 1.1% from December levels, even the skeptics may be stunned by how rapidly deflation is gripping the continent.

Much as the 3rd grade Markit US Manufacturing PMI 'beat' was blamed for the furious rally last Thursday in stocks, it appears bad news in the form of today's 3rd grade Markit Services PMI 'miss' is (rightly) completely ignored by the market. While the Services segment of the economy is vastly larger and more important for 'guessers', it seems USDJPY would not provide the juice this morning as this is the weakest services performance in 4 months. Of course, "weather" is blamed and optimism for the future remains but what was odd to us is that economists claim that in February manufacturing returned to normal... but clearly services did not.

The last 3 days have seen China's Shanghai Composite index tumble over 3% - its largest drop since October as sentiment comes under pressure from concerns about tightening in the real estate sector. The pace of price appreciation has slowed notably - especially 'existing' apartment sales (i.e. the speculators are exiting) - as it appears houing demand is cooling off with the number of cities with falling MoM home prices rose to six in January from two in December.The PBOC has jawboned as much and real estate sector financial condtions are tightening is slowing as a number of banks curb lending to developers. This is weighing on copper prices also as construction activity slows (exacerbating problems in the shadow banking system's collateral pools). The PBOC is getting what they wanted - but may regret it.

• Ukraine Seeks $35 Billion as Yanukovych Warrant Is Issued (BBG)
• Ukraine's fugitive president wanted for mass murder (Reuters)
• Polar Vortex to Bring More Snow on Return to U.S. This Week (BBG)
• China property prices continue to rise (FT)
• Microsoft Said to Cut Windows Price 70% to Counter Rivals (BBG)
• Pentagon to propose shrinking Army, scrapping some jets (Reuters)
• Hedge Funds Turn Bearish on S&P 500 as VIX Advances (BBG)
• Draghi’s Data Jigsaw Takes Shape as ECB Readies Showdown (BBG)
• China, eyeing Japan, seeks WW2 focus for Xi during Germany visit (Reuters)

Asian equities are trading lower across the board on the back of some negative credit stories from China. Shanghai Securities News noted that ICBC and some other banks have curbed loans to developers in sectors such as steel and cement. Slower gains in home property prices in China’s tier 1 cities are also not helping sentiment. Beijing and Shenzhen prices rose 0.4% in January, which looks to be the slowest monthly gain since October 2012 according to Bloomberg. Elsewhere there are reports that a property developer in Hangzhou (Tier 2 city in China) is reducing its unit prices by 19%. Our property analysts noted that given the strong gains seen in Tier-1 and some bigger Tier-2 cities in 2013, a slowdown or negative trends in price growth should not be a surprise. Nevertheless, it has been a very weak day for Chinese and HK markets with the Shanghai Composite and the Hang Seng indices down -2.0% and -1.2% lower as we type. Across the region, bourses in Japan and Korea are down -1.0% and -0.6%, respectively.

In what appears yet another straw on the camel's back of Mt.Gox (following the re-freeze of account withdrawals), the Bitcoin Foundation this evening reported that:

"effective immediately, Mt. Gox has submitted their resignation from the board of directors."

Bitcoin prices on the dying exchange tumbled on the announcement after quite an extreme volatility day - which saw prices swing from $151 to $239 and then down to $190 on the news.

A Chinese military officer has said that establishing a South China Sea ADIZ is necessary to China’s national interest. Li Jie's comments come on the heels of remarks made by U.S. Captain James Fanell, director of intelligence and information operations at the US Pacific Fleet (full clip below) on China's preparation for war with Japan (and other regional nations) and sources saying that China’s Central Military Commission has directly given Chinese military the instruction: “Fight if it is appropriate to fight.”

To summarize: in an act of complete disregard for the official diplomatic song and dance, both Israel and the US are now providing military support to Iran, which in turn is providing military support to Syria, which is also getting military support from Russia. And now, just to make things more interesting, the same labyrinth of "military support" is about to be unleashed in the Ukraine, whose western half is just as likely getting arms and military equipment (not to mention funding)from the West under the table, while Russia, whose main Black Sea port is in the Ukraine's Crimean peninsula, is arming the Eastern part of the Ukraine.

What can possibly go wrong?

The last 3 weeks have seen the macro fundamentals of the G-10 major economies collapse at the fastest pace in almost 4 years and almost the biggest slump since Lehman. Despite a plethora of data showing that 'weather' is not to blame, US strategists, 'economists', and asset-gatherers are sticking to the meme that this is all because of the cold on the east coast of the US (and that means wondrous pent-up demand to come). However, as the New York Times reports, for the earth, it was the 4th warmest January on record.

Social media is increasingly home to civil society. As Pew Research notes, it is the place where knowledge sharing, public discussions, debates, and disputes are carried out. As the new public square, social media conversations are therefore as important to document as any other large public gathering. By analyzing many thousands of Twitter conversations, Pew identified six different conversational archetypes. The following infographic describes each type of conversation network and an explanation of how it is shaped by the topic being discussed and the people driving the conversation... the structure of these Twitter conversations says something meaningful about political discourse these days.

The tyranny of models is rampant in almost every aspect of our investment lives, from every central bank in the world to every giant asset manager in the world to the largest hedge funds in the world. There are very good reasons why we live in a model-driven world, and there are very good reasons why model-driven institutions tend to dominate their non-modeling competitors. The use of models is wonderfully comforting to the human animal because it’s what we do in our own minds and our own groups and tribes all the time. We can’t help ourselves from applying simplifying models in our lives because we are evolved and trained to do just that. But models are most useful in normal times, where the inherent informational trade-off between modeling power and modeling comprehensiveness isn’t a big concern and where historical patterns don’t break. Unfortunately we are living in decidedly abnormal times, a time where simplifications can blind us to structural change and where models create a risk that cannot be resolved by more or better modeling! It’s not a matter of using a different model or improving the model that we have. It’s the risk that ALL economic models pose when a bedrock assumption about politics or society shifts.

Presented with no comment...

As happens at the end of every year, sellside analysts and economists, all predicted that this year would be different, and the long overdue capex spending would finally be unleashed. Apparently they had far greater visibility on this matter, than on the topic of snowfall in the winter, and its disastrous impact on a $17 trillion economy, whose Q1 GDP growth forecast has cratered from 3% at the start of the year, to barely half that number currently. One of the firms that preached that the CapEx recovery is imminent is none other than Goldman Sachs, the same firm that also year after year predicts a new golden age for the US, only to see its forecast crash and burn some 4-6 months later, couched in the tried (or is that now trite) and true scapegoatings: snow, unrest in Europe, inflation or deflation in Japan, the usual. However, this time may indeed be different, and the same Goldman has just released a piece wondering "Why no capex recovery?" (despite the firm's own forecasts to the contrary -just recall David Mericle's "Capex: The Fundamentals Remain Strong" which now in retrospect is completely wrong).